Were Hedge Funds Right About Crowding Into Chegg Inc (CHGG)?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Chegg Inc (NYSE:CHGG)? The smart money sentiment can provide an answer to this question.

Chegg Inc (NYSE:CHGG) investors should be aware of an increase in enthusiasm from smart money in recent months. Chegg Inc (NYSE:CHGG) was in 45 hedge funds’ portfolios at the end of June. The all time high for this statistics is 39. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 34 hedge funds in our database with CHGG positions at the end of the first quarter. Our calculations also showed that CHGG isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

To most stock holders, hedge funds are assumed to be underperforming, outdated investment vehicles of yesteryear. While there are over 8000 funds trading at present, We choose to focus on the top tier of this group, approximately 850 funds. These hedge fund managers manage the majority of all hedge funds’ total asset base, and by watching their unrivaled stock picks, Insider Monkey has determined a few investment strategies that have historically outperformed the broader indices. Insider Monkey’s flagship short hedge fund strategy outstripped the S&P 500 short ETFs by around 20 percentage points a year since its inception in March 2017. Our portfolio of short stocks lost 34% since February 2017 (through August 17th) even though the market was up 53% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Israel Englander of Millennium Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind let’s take a glance at the fresh hedge fund action surrounding Chegg Inc (NYSE:CHGG).

Hedge fund activity in Chegg Inc (NYSE:CHGG)

At second quarter’s end, a total of 45 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 32% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards CHGG over the last 20 quarters. With hedge funds’ sentiment swirling, there exists a few notable hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

The largest stake in Chegg Inc (NYSE:CHGG) was held by Sylebra Capital Management, which reported holding $205.3 million worth of stock at the end of September. It was followed by Millennium Management with a $96.7 million position. Other investors bullish on the company included Citadel Investment Group, SCGE Management, and Millennium Management. In terms of the portfolio weights assigned to each position Selkirk Management allocated the biggest weight to Chegg Inc (NYSE:CHGG), around 9.32% of its 13F portfolio. Greenhouse Funds is also relatively very bullish on the stock, setting aside 6.48 percent of its 13F equity portfolio to CHGG.

As aggregate interest increased, key money managers have been driving this bullishness. Millennium Management, managed by Israel Englander, assembled the most outsized position in Chegg Inc (NYSE:CHGG). Millennium Management had $96.7 million invested in the company at the end of the quarter. Christopher Lyle’s SCGE Management also initiated a $82.4 million position during the quarter. The other funds with brand new CHGG positions are Israel Englander’s Millennium Management, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, and James Crichton’s Hitchwood Capital Management.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Chegg Inc (NYSE:CHGG) but similarly valued. We will take a look at Mylan N.V. (NASDAQ:MYL), Gold Fields Limited (NYSE:GFI), Caesars Entertainment Inc. (NASDAQ:CZR), MGM Resorts International (NYSE:MGM), Carnival Corporation & plc (NYSE:CUK), Pinnacle West Capital Corporation (NYSE:PNW), and Everest Re Group Ltd (NYSE:RE). This group of stocks’ market valuations are closest to CHGG’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.1 hedge funds with bullish positions and the average amount invested in these stocks was $1218 million. That figure was $1005 million in CHGG’s case. Caesars Entertainment Inc. (NASDAQ:CZR) is the most popular stock in this table. On the other hand Carnival Corporation & plc (NYSE:CUK) is the least popular one with only 14 bullish hedge fund positions. Chegg Inc (NYSE:CHGG) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CHGG is 83.1. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 30% in 2020 through October 23rd and still beat the market by 21 percentage points. Hedge funds were also right about betting on CHGG as the stock returned 29% since the end of Q2 (through 10/23) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

Disclosure: None. This article was originally published at Insider Monkey.